More than 1 million Australian shareholders in ANZ and the Commonwealth Bank have an important decision to make before 5pm next Tuesday, when both issuers simultaneously close their respective capital raisings.

Should retail investors take up the offer to buy more shares in either bank at a time when equity markets are gyrating wildly?

ANZ was widely pilloried, including by Crikey, for doing a $2.5 billion institutional placement at $30.95 and then offering retail shareholders a $500 million share purchase plan (SPP), which will be priced at a 2% discount to the market price.

However, given that those institutional in investors are currently losing $322 million on those 80.77 million new shares based on last night’s closing price of $26.96, ANZ’s arguments in defence of its offer are looking stronger.

Indeed, chairman David Gonski has been going into great detail in correspondence with retail shareholders who have complained about ANZ’s failure to do a pro rata offer.

He’s right to point out that ANZ paid out about half as much as CBA and NAB in fees to investment banks and that retail shareholders will be able to buy new shares at a solid discount to what the institutions paid.

It will be fascinating to see what level of shareholder participation ANZ and CBA achieve with share prices tumbling as investor confidence wobbles.

NAB has been kind enough to provide Crikey with some interesting data from its recent $5.5 billion pro-rata capital raising. NAB’s retail component raised approximately $2.04 billion from more than 265,000 applications. This means that about 235,000 of NAB’s 500,000 eligible shareholders declined to take up the two-for-25 offer at $28.50.

The retail take up was approximately 72% by value, although this also includes institutions who bought entitlements to the new shares from retail sellers on the market.

The total $2.9 billion NAB retail offer comprised about 100 million new shares with the 28% shortfall sold to institutions.

The outcome for NAB’s non-participants was not equitable because institutions received $5.30 for their rights, but retail investors only collected $3.10 a few weeks later, reflecting weakness in the broader market.

The same thing is likely to happen when CBA’s $3.1 billion one-for-23 retail offer at $71.50 closes next Tuesday. Non-participating institutions collected a tidy $6.50 for their rights, but given CBA shares closed at just $71.97 last night, there is likely to be a big shortfall that attracts a small premium. Indeed the offer went underwater briefly this morning when CBA shares hit a low of $71.26 before recovering to $71.92 by 11.30am.

If the markets continue to dip, we might even have the unusual situation of CBA’s under-writers and sub-under-writers being left with shortfall stock and having to shell out something for their $67 million in fees.

Before CBA launched its capital raising, the bank’s 800,000 retail investors collectively controlled about 60% of the shares on issue, more than any other top 20 company.

However, with perhaps as many as 500,000 CBA shareholders declining to buy these new shares, they will collectively be diluted when their entitlements finish up in institutional hands.

Despite opting for the structure that normally treats retail investors most fairly, both NAB and CBA will finish up collectively diluting retail investors and providing bigger compensation to non-participating institutional investors. This is not good.

ANZ, by way of contrast, will be selling new shares to retail investors at a discount of around 15-18% to the $30.95 paid by participants in the institutional placement.

However, it remains to be seen just how many ANZ shareholders take up the $15,000 SPP offer. The offer is nominally capped at $500 million but chairman Gonski is penning letters that say “the Board will consider its options about possibly increasing the size of the offer” if there are over-subscriptions.

This remains in prospect because ANZ has commendably sent an email reminder to those shareholders — about a third of the total — who have opted for electronic communications. This move alone will probably bring in more than $100 million of additional applications.

Even if you BPAY the funds through at 4.59pm on Tuesday after the market has closed, the ANZ SPP, with its 2% discount to market pricing, is not necessarily a great offer because the new stock does not trade until Thursday, September 21. This is a longer than usual holding period. When combined with heavy market volatility, I’ll be giving this offer a miss.

As the proud owner of just six CBA shares, I was surprised to be even offered the chance to buy one new share at $71.50 in what was meant to be a one-for-23 retail offer.

The decision to take this up will be made after the market closes on Tuesday, but it doesn’t really matter as the right will be sold to the highest bidder in what could end up being a $2 billion-plus retail shortfall auction on Monday, September 14.

Peter Fray

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